Capital Markets

Banks, companies in mixed forecasts on shilling exchange rate

cbk

The Central Bank of Kenya offices in Nairobi. FILE PHOTO | NMG

charlesmwaniki_img

Summary

  • Banks and private sector companies are offering varied expectations on the direction of change in the shilling’s exchange rate in the short term, with concerns rising about the high import bill.
  • The shilling has been trading in a tight range of 108.00 and 108.75 units to the dollar since the beginning of July, backed by ample forex reserves at the CBK from the proceeds of external loans worth more than $2 billion.

Banks and private sector companies are offering varied expectations on the direction of change in the shilling’s exchange rate in the short term, with concerns rising about the high import bill.

The Central Bank of Kenya (CBK) said some respondents were bullish about the shilling on expectations of higher agriculture earnings and diaspora inflows, while others expressed concerns about the higher import bill and rising political temperature in the country.

The shilling has been trading in a tight range of 108.00 and 108.75 units to the dollar since the beginning of July, backed by ample forex reserves at the CBK from the proceeds of external loans worth more than $2 billion that was taken up towards the end of June.

CBK said that those expecting it to strengthen against the dollar see support coming from higher volumes of exports, especially floriculture as export markets reopen from lockdowns.

“However, respondents indicated that receipts from tourism were expected to remain low due to the ongoing pandemic.

“Respondents were also concerned about the heightened political activity which may affect investment and the increase in the import bill due to the rise in global oil prices,” said the CBK.

The current account, which measures the balance between hard currency inflows and outflows, widened to 5.4 percent in June from 4.8 percent at the beginning of the year, ideally indicating pressure on the shilling.

The CBK, however, expects this to narrow to 5.2 percent by the end of the year.

However, the exchange market has defied this, with the shilling gaining on the dollar since January — when it opened the year at an average of 109.30 units.